Not Choosing Individual Stocks in This Market?

For some time now, I noticed that I haven't been blogging about individual stocks. The market has been bad, and I didn't think the time was right to start going for stock home runs.

Then yesterday, on the CNBC show Mad Money, Jim Cramer says something very similar, that he is not recommending many stocks in this market because the market is very bad.

Thank you Jim Cramer for echoing my thoughts exactly.

There is a common market saying that a rising tide lifts all boats. The same thing can be said about the opposite of that saying.

Some reminders:

1. Your 401k money is long term money (assuming you have many years or decades before you have to take money out.) If you have a diversified set of broad based ETFs or mutual funds, you can ride out this market. Continue to put money in your 401k and continue to accumulate.
   
2. In your discretionary fund, are you taking too much risk?
   
3. Do you have high interest rate consumer or credit card debt? Consider paying it off.
   
4. Do you have a 3-6 month emergency cash fund in conservative investments?
   
5. If you think there is a housing bottom within five years, and you intend to buy a house with money from your discretionary portfolio, then maybe you can take some money out and put the money in more conservative investments (high yielding online savings account, for example.)
   
6. Don't forget about controlling your losses.
   

I intend to create a new blog entry commenting on today's monster rally in the US Stock Market.

Yahoo/Google Revisited, Quick Valuation Update

We are in the middle of the great Information Revolution and some companies have to make sense out of all the data in the world and make it useful to the end user.

Google (GOOG) is an obvious play and so is Yahoo (YHOO).

GOOG is the one which is most likely a better investment.

GOOG has a forward PE of 32, 5 year growth rate of 34.4% for a Price to Earnings Growth Rate Ratio (PEG) of a very low 0.93 (under 1 is very cheap, over 2 is overvalued).

Ignore the actual price of the stock (GOOG is close to $700), and pay more attention to the other measures of valuation.

YHOO (Yahoo) has a forward PE of 42.63 and a 5 year estimate growth rate of 25.4% for a PEG of 1.70.

The PEG of Yahoo (YHOO) is still under 2, but Google (GOOG) is still a great value and worth investing in.

Improved Version of the PEG Ratio

In a previous article, we used the PEG ratio to evaluate a stock. While the PEG ratio is a good method, I've decided to create my own variation of the PEG ratio which I'll call MyPEG.

The Formula is this:

MyPEG = ((Current Price - Cash Per Share) / Forward Earnings) /
(Yield + 5 Yr Estimated Growth Rate).

What this does is take into consideration the dividend yield of a stock. It also takes into consideration how much cash is in the stock. As legendary investor Peter Lynch said, by taking cash per share into the equation, we might be able to find great bargains out there.

We will still use MyPEG the same way as PEG. A MyPEG < 1 means the stock is cheap, while a MyPEG > 2 is very expensive. We can compare stocks using MyPEG, but it's better to compare stocks in the same industry.

How to find the numbers through Finance.Yahoo.com

Go to Finance.yahoo.com and enter your stock symbol. You get a nice summary page with basic information and news. A very useful page is the Key Statistics Tab.

You can find this information there:

1. Market Cap: Top Part of Page
   
2. Trailing PE: Top Part of Page
   
3. Forward PE: Top Part of Page
   
4. Price: Very Top of Page
   
5. Cash per Share: Bottom Left side under Balance Sheet.
   
6. Yield: Lower right corner under Dividends and Splits
   

Another useful tab is the Analysts Estimates Tab.

You can find this information there:

1. Trailing 12 months Earnings: Top part of Page, look at Year Ago EPS under Current Year (Dec-07).
   
2. Current Year Earnings: Top part of Page, look at Avg. Estimate under Current Year (Dec-07).
   
3. Future Earnings: Top part of Page, look at next Year, Avg. Estimate
   

So to calculate the MyPEG of General Electric (GE):

MyPEG = ((Current Price - Cash Per Share) / Forward Earnings) /
(Yield + 5 Yr Estimated Growth Rate).

1. Current Price (June 22, 2007): 38.24
   
2. Cash Per Share: 1.872
   
3. Forward Earnings: 2.49
   
4. Forward Yield: 2.90%
   
5. 5 Yr. Estimated Growth: 10%
   

MyPEG = ((38.24 - 1.872) / 2.49) / (2.9 + 10)
= 1.13

Note regarding Banks and Brokers

You shouldn't use items like Cash Per Share in companies such as Banks or Brokers. It won't be accurate. Just see the Cash Per Share of Goldman Sachs (GS): 1,769. Not a valid number to use in the MyPEG formula.

Credits

I came up with adding Yield to the 5 Yr. Growth Rate by myself. I was inspired to use the cash per share method by reading Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market, an excellent book. I definitely recommend it. (Other Book Recommendations in the link or to the section to the right).

I combined both methods and created the MyPEG.

Note on PEG and Growth Rates

In other posts such as this analysis of Computer and Video Game Stocks, I often put in this section regarding PEG and Growth Rates because Growth Rates are estimates and may not be as reliable:

"When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred."